Soliton, Inc.
Q2 2020 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen -- good morning, ladies and gentlemen. And welcome to the Soliton’s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded. I would like to introduce your host for today’s conference, Carol Ruth, Founder and President of the Ruth Group, Soliton’s Investor Relations firm. Please go ahead.
  • Carol Ruth:
    Thank you, Operator, and welcome to everyone participating on today’s call. This call is also being broadcast live over the Internet at soliton.com and a replay of the call will be available on the company’s website for 30 days. With me today are Wally Klemp, Co-Founder and Executive Chairman; Chris Capelli, Co-Founder, Chief Executive and Scientific Officer; Lori Bisson, Chief Financial Officer. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of the United States Securities Laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management’s current assumptions and expectations of future events and trends, which may affect the company’s business, strategy, operations or financial performance. A detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate projection or forward-looking statements. The company intends to file the Form 10-Q for the quarter ended June 30 by the end of day today. Now let me hand the call over to Wally. Wally?
  • Wally Klemp:
    Thanks, Carol, and good morning, everyone. We’re pleased to share with you Soliton’s second quarter 2020 results and provide further color on the planned 2021 U.S. commercialization of our Rapid Acoustic Pulse device and the various steps that we’re taking to ensure that we’re best positioned for long-term success, especially in the current environment. As we have previously disclosed, because of the impact of the pandemic, we voluntarily delayed the initial launch of the RAP device until the first half of 2021. We continue to believe that the present environment is suboptimal for a new technology launch and that pursuing this revised launch plan is in the best interest of our customers and investors. It’s clear that the impact of COVID-19 on the global economy continues to be significant and through conversations with our advising physicians in the aesthetic space, that their practices remain limited by social distancing requirements that are constraining the number of patients that they can see in each day. Dermatologists and plastic surgeons are understandably focused on scheduling procedures that generate immediate cash flow for their practices and without capital outlay, so this means an emphasis on meeting the pent-up demand for fillers and neurotoxins injections. We believe this dynamic will continue throughout the rest of 2020 and we simply don’t want to launch into a suboptimal environment with a brand new technology. Our ultimate revenue model is powered by repeat single-use cartridge sales, which are used for each patient by the practitioner. As such, practitioner buying and adoption will be critical to our long-term success. This is an exciting new technology and we want to launch it into the marketplace under conditions that allow doctors to focus on maximizing the potential of this technology in their practices and current conditions simply don’t allow for that dynamic. We continue to be optimistic and we believe that there will be enough recovery in the aesthetic marketplace to make the first half of ‘21 -- 2021 an appropriate launch window and we expect the esthetics industry to begin to demonstrate a pattern of stabilization which we hope will allow our dermatology customers enough predictability and consistency in their practices that they’ll be open and receptive to something entirely new. Throughout the second quarter, we achieved a number of key milestones necessary to maintain our commercial launch timeline. We also use this time to explore additional clinical work that would add to our technological abilities and long-term medical potential. In addition to the key regulatory progress that we made during the quarter through the filing of our 510(k) for cellulite reduction, we bolstered our balance sheet through a secondary financing, expected to be adequate to fund the business over the next two years into the fourth quarter of 2022. So, although, COVID-19 has created a number of challenges for Soliton and the overall market in general, it hasn’t stopped our progress. So now I’d like to pass the call over to Dr. Chris Capelli, our CEO for more context around our second quarter achievements and upcoming milestones. Chris?
  • Chris Capelli:
    Thank you, Wally, and good morning. As Wally touched upon, we believe our latest strategy to launch the RAP device in the first half of 2021 best positioned Soliton for long-term success. Although, the COVID-19 pandemic push Soliton to amend a strategic path-forward, it did not impede the progress of the company as a whole. On June 30th, we filed our 510(k) Premarket Application with the FDA for our Generation II Rapid Acoustic Pulse device for the treatment of cellulite. This application was supported by the positive pivotal cellulite trial results that were presented to the scientific community at the virtual American Academy for Dermatology Conference. The FDA accepted our application, deeming it administratively complete in early July, putting Soliton on track to FDA clearance at the conclusion of first quarter 2021. Management believes that there’s a reasonable expectation that the FDA will allow us to remain on the 510(k) clearance pathway in order to market the product. However, our timelines commercialization should not be impacted, as it allows time for an average de novo process, should the FDA disagree with our predicate argument and ask us to shift from a 510(k) pathway for approval to de novo. As we stated before, the extended timeline ahead of the initial launch has allowed us the opportunity to launch the RAP device incorporating both the tattoo removal indication, as well as the cellulite indication pending FDA approval of the latter. We believe launching the RAP technology for two approved indications versus one is a clear advantage for our launch. Firstly, we believe that launching has a platform technology that includes cellulite rather than a single indication with tattoo along. For instance the caliber of key accounts that will accept the device in the initial launch stage, supportive of key opinion leaders in this space will be critical to successful nation-wide rollout. Secondly, our marketing spend will be leveraged across both indication, allowing us to both increase brand awareness of our parent brand name across both the tattoo and cellulite treatment solutions. Lastly, the incremental device upgrade we plan to make during the second half of 2020 will simplify the use of the device for our practices, making significant practice adoption much more likely. As an example, we will be launching with a cartridge that self loads and eliminate any and all variability that currently exists in the manual loading process. Furthermore, the incremental manufacturability enhancements plan to be incorporated prior to the initial launch will reduce the cost of goods and improve margins ahead of their originally expected timeline. The recent successful completed equity raised property capitalized the company to launch with a full and robust marketing support for successful launch that can both demonstrate traction with our consumables and they will practice largely moving into nationwide rollout. As we progress towards our expected launch date, we’re ramping up our manufacturing efforts to ensure we are ready to ship on day one. Our global manufacturing partner Sanmina has initiated preliminary steps in the manufacturing supply chain, fixtures and tooling to build a prototype devices that will be used to validate our production line had been ordered, as well as all the component parts for the testing prototypes and commercial devices to be built. Simultaneous to our manufacturing progress, Soliton has welcome Jim Bucher as Consultant Head of Sales; and Jennifer Cook as Vice President of Marketing to lead the sales and marketing efforts that will underscore our initial commercial launch. Together, they will generate and implement the strategic sales and marketing initiatives, including practice initiation strategies, training programs and marketing launch support materials to effectively reinforce the market introduction of the RAP device. Also, during the second half of this year, we plan to hire the first members of our practice development team in order to support initially placed devices. The practice development team will coordinate training programs on both the implementation of the technology, as well as practice development tools designed to help the physician for influenced existing patients and attract new eligible patients for Soliton’s RAP treatments in their offices. We believe creating a comprehensive support network for our physician will lead to a superior overall practice experience and assist in generating patient traffic. Now turning to our clinical work, as a result of the ongoing pandemic and given the state of the dermatology marketplace, we have experienced significant challenges with follow-up visits in our ongoing cellulite clinical trial assessments and delays in the initiation of further clinical trials at sites around the country. We expect this to impact the timing of the longer term follow-up visits in our cellulite pivotal study, as well as Soliton to add additional fibrotic scars proof-of-concept study. As soon as it is feasible, we will continue our cellulite clinical trial and initiate the study work that is planned. In addition, we still believe that keloid and hypertrophic scar indication, which is a fibrotic condition is a significant potential expanded indication longer term for Soliton, we are equally enthusiastic for RAP devices impact on other fibrotic disorders. Again, the clinical results from our 12-week keloid and hypertrophic scar proof-of-concept study completed in January were very encouraged as a demonstrated approximately 30% average reduction in scar biles from a single initial treatment with continued benefit of hypertrophic follow up visit. Further, based on the proof-of-concept trial, we intend to explore the potential efficacy of our RAP device for other fibrotic disorders such as capsular contraction, Peyrone’s disease and liver fibrosis, which we are very eager to further investigate through additional clinical work. However, as it is increasingly difficult to enroll and treat patients in human trials during this time, we are exploring animal models that will allow us an opportunity to demonstrate the impacts of our mechanism of action on our fibrotic target, like say, like, in scars. While we are committed and strongly focused on the upcoming initial launch of our RAP device, we believe there’s an opportunity to unlock additional value to other target indications, which we intend to pursue. Now before I turn the call over to Lori for comment on our second quarter financial performance, I’d like to conclude that although COVID-19 made a return in the market, Soliton is making every effort to drive our continued momentum and execute on the milestone ahead of us. In this time of uncertainty, we will focus on the variables control while being flexible when needed to best position Soliton for future growth and success. With that, I will pass the call over to Lori.
  • Lori Bisson:
    Thanks, Chris, and good morning to everyone. For the second quarter ended June 30, 2020, operating expenses were $3.1 million, as compared to $3 million in the second quarter of 2019. The increase is primarily attributed to higher research and development expenses, resulting from greater spending with development partners and costs related to clinical trials. Net loss for the second quarter ended June 30, 2020 was $3.1 million or $0.19 per share on a basic and diluted basis. For the same period in the prior year, net loss was $3 million or $0.20 per share on a basic and diluted basis. As of June 30, 2020, outstanding shares of common stock were 21.2 million. Total cash, cash equivalents and restricted cash was $37.5 million as of June 30, 2020, compared to $7.7 million as of March 31, 2020, including total gross proceeds of 35 million from Soliton’s June 2020 follow on offering. We believe the company’s cash, cash equivalents and restricted cash on hand is sufficient to fund the company’s operations into the fourth quarter of 2022 and allows the company to support initial revenue generation through the first 18 months of the commercial launch of the RAP device. The proceeds from the financing will fund the initial commercialization of the RAP device, including the early manufacturing, fundamental brand development investment and the initiation of a sales force and practice development team. It’s also important at this time to review our financial history. We have been a public company for a little less than 18 months, having gone public in February of 2019, and an IPO price of $5 per share with a market cap of approximately $73 million at the time. Since the IPO, we’ve raised an additional $53 million at transaction prices ranging from $8.30 to $14 a share and our market cap has approximately double today to around $149 million. In a very uncertain financial market, we have secured the capital that was needed to transition from a research company to a full-fledged commercial entity, $35 million financing most recently closed allows our executive leadership to be laser focused on executing our commercial strategy without the distraction of ongoing financing activities. Ultimately, we believe this will translate to shareholder value. I’ll now turn the call back over to Wally for closing remarks.
  • Wally Klemp:
    Thanks, Lori. It is an exciting time here at Soliton as we begin our transition into a commercialized entity and continue the significant clinical exploration, as Chris mentioned, to further expand potential indications for our technology. Despite the opaque, economic and aesthetic environment driven by the ongoing COVID pandemic, we remain optimistic that the markets will recover and long-term demand for acoustic procedures will continue to grow at the same fast pace that we’ve seen in the past. Before we open up the call to Q&A, I would like to address a question that has come up from a number of investors lately, which is, why not just launch immediately into the tattoo indication? Well, the answer is that we only get one chance to make a first impression. Specifically, we only get one shot to get the full benefit of introducing a brand new technology into this marketplace. We intend for this launch to be successful and account initiation and patient adoption along with the resulting physician advocacy are absolutely critical to a successful launch. While we could have forced some tattoo removal equipment into the marketplace and try to fight against the COVID headwinds, if you will, we believe it was strategically wiser to introduce our technology when we have the best chance for success with a more receptive commercial audience. As we evaluated when we thought that might be, we began to see alignment with our anticipated clearance for cellulite reduction. This affords the opportunity to launch our technology for both tattoo removal and cellulite at the same time, and therefore, leverage brand support spending and account initiation activities. And keep in mind, although, our revenue model is designed to emphasize recurring revenue from replaceable cartridges, there is still a capital equipment component to opening a new account and we believe that the decision by a physician to incur a new capital expenditure and embrace a new practice routine is likely to be easier to make once they feel that their core practice is on the road to stability and predictability. That’s a compelling reason for us to pick our moment carefully. But once practices settle into whatever the new normal is for them, we also believe they’re going to be eager to offer an exciting new technology like ours to reengage with their client base. In closing, I would like to take this opportunity to thank all of our Soliton employees for their continued dedication and our investors for their ongoing support. With that, I’ll turn the call over for Q&A to the operator.
  • Operator:
    [Operator Instructions] Your first question comes from Louise Chen.
  • Louise Chen:
    Hi. Thanks for taking my questions here.
  • Lori Bisson:
    Hi.
  • Louise Chen:
    So I had a few, first question I had for you is, have you seen any turnaround in the esthetics market and is there any flexibility to push up the timeline for the launch pending approval for cellulite if ascetics market returns quicker than you anticipated? And then, secondly, what is your go-to-market strategy for cellulite and tattoo? Is there any overlap here and physicians or patients? How big of a sales force will you need with a marketing campaign will you have? And the last question is, when will you know if the FDA will approve the cellulite indication based on the 510(k) or if they will -- more clinical work will be required? Thank you.
  • Lori Bisson:
    Sure.
  • Wally Klemp:
    Lori, that sounds like it’s right down your alley, Lori.
  • Lori Bisson:
    Good morning, Louise. I’m glad to have you on the morning.
  • Louise Chen:
    Hi. Good morning.
  • Lori Bisson:
    Let…
  • Louise Chen:
    Thank you.
  • Lori Bisson:
    Let me start with how -- what we’re seeing in the aesthetic marketplace and then try to remember all your questions in order from there. So what we’re seeing right now is that there’s a reopened into a fairly significant degree about 80% of dermatology, cosmetic dermatology practices have reopened. And we’re seeing aesthetic procedures for some companies approached 80% to 90% of their volumes from the same period last year in Q2 that’s what we saw that specifically for injectable. And we are a little bit concerned right now in the recent trend in rising case count causing some retreatment in that progress. So we expect Q3 will be a little disappointing in relation to Q2 as far as number of procedures being performed. But I think what we learned from Q2 was that the market is recovering, right, the market does return to some form of normalcy and we would expect that to happen after Q3 and the second wave of COVID that going across the country. We also expect, doctors are smart people and we expect that they will learn new techniques and ways to deal with the throughput issues that they’re seeing at their practices, which are caused by increased social distancing requirements and increased sanitary requirements to clean between office visits so thoroughly. We think they’ll be bugs some of what’s causing reduced throughput as we live in this new world. So we’re very optimistic that we’ve seen some recovery already and we expect that recovery continue. So you additionally asked a question about our go-to-market strategy with cellulite and tattoo. And so from a -- from one perspective, those are two very different marketplaces, when you consider the potential patient. From another perspective, they’re treated in a common location. So from a selling approach, doctors offices, like, dermatologists, specifically cosmetic dermatologists, plastic surgeons and medi-spas that are managed by a physician or directed by a physician are target for both cellulite reduction and tattoo removal. And so the selling proposition worked very well in -- because the accounts have a common basis for treating both of those indications. From a marketing perspective, when we start talking to patients, our strategy will be to build recognition and value around an umbrella parent brand and then speaks directly to the consumers need underneath that umbrella. And so we have -- we are doing lots of research constantly about where is our target patient, finding their information, what are they concerned about? Who are they listening to? So that we’re ready to engage in that conversation with them as we go to market. I think there was one more question that you asked that I have not...
  • Wally Klemp:
    Yeah. So, Lori, I can tackle that last one that Louise was asking, is there an opportunity to accelerate the launch window here and back me up on this, Lori. But what I would say, Louise is, first of all, and I know you know this, but launches like this are pretty complex. I mean, there’s -- there are a lot of important factors and procedures that have to align and be sort of brought together at the same time for a really successful launch. And that includes the necessary regulatory approvals on the latest version of the equipment that you intend to put in the marketplace and you have to make that commitment far enough in advance so that the production line is validated to make the product that you intend to have the latest FDA clearance for when it’s time to launch that product, just as an example. And so on timing and coordinating all of those things requires a lot of advanced planning. And once you put that plan in motion, it’s pretty difficult to materially change the timeline, you can delay the timeline, but accelerating the timeline is nearly impossible to have it all coordinated the way you need it to be for a successful launch. So I -- the direct answer to your question is, we don’t see a lot of opportunity to accelerate this, let’s say, just because we got a slightly faster approval from the FDA than we might have planned on, for example. We’d love for that to be the case, but the launch -- the whole launch process is just too complex to say, we got an extra couple of months here, let’s ramp everything up. Having said that, the feedback we’re getting from clinicians is that the timing we’re choosing, they think is pretty smart. As Lori mentioned, there’s a lot of sorting out here that practices are doing and they’re establishing new procedures and they’re doing that on the back of the procedures that they most normally were -- those they are go to procedures, the ones that they most normally rely on for cash flow. And so right now and during -- we would argue the balance of this year, we’re not -- we’re probably not going to get the mindshare from clinicians that we otherwise would once they’ve kind of settled in and established what that new normal is. So we really believe they -- we need to get those practices or need to see those practices get to the point where now they’re ready and hungry for something new and it’s -- there are just too many moving parts right now. So sorry for the long-winded answer and Lori, did I leave anything out there in terms of how that timing is impacted.
  • Lori Bisson:
    No. I think that was the right answer, Wally.
  • Wally Klemp:
    Okay. Okay. So, Louise, does that make sense for you?
  • Louise Chen:
    Yes. Thank you very much for all the answers.
  • Wally Klemp:
    Yeah. You bet.
  • Operator:
    Your next question comes from Anthony Vendetti with Maxim Group.
  • Anthony Vendetti:
    Thank you. Good morning.
  • Wally Klemp:
    Hey, Anthony.
  • Chris Capelli:
    Good morning.
  • Lori Bisson:
    Good morning.
  • Anthony Vendetti:
    Hey. How are you doing? So just on the latest system that you submitted for FDA approval, can you talk about any of the system enhancements and then any actual feedback so far from the FDA on your June 30th submission or conversations with them at this point?
  • Lori Bisson:
    Sure.
  • Wally Klemp:
    So why don’t I talk about the enhancements, but Lori, I’ll leave it to you to sort of talk about the FDA feedback and procedure.
  • Lori Bisson:
    Okay.
  • Wally Klemp:
    So, Anthony, there are -- although the device physically will look about the same as it -- as the last device that we got clearance from on via special 510(k). There are a lot of seemingly small changes, but ones that we know will make a huge difference in sort of the flow of procedure in the office. We’ve now lived with this equipment in a clinical setting through clinical trials for a long time and we’ve watched people interact with the device and diligently taking note of ways that we might be able to make the experience more sort of seamless for clinicians. Because as you know, there are under a lot of pressure, they -- what they can’t tolerate is a lot of things that disrupt their flow and their interaction with their patients. So we need our equipment experience for them to be, like, I say seamless, and constructive. One of those things is, as Chris mentioned, the ability for cartridges to be auto loaded. There’s a lot going on here, as you know, there’s 9 million watts of power in every spark that makes an acoustic shockwave from our device and we’re doing that at 50 times a second to 100 times a second. So there’s a lot of physics that are involved in that that cartridge. And because of that, that cartridge has to be very precisely installed to torque settings and to ensure that it always functions the same every time. And what we’ve sort of learned along the way was we didn’t want to leave that to the individual practitioner. And so the auto loading function takes all of that out of their hands. They simply just push a button on the screen. The cartridge comes out into their hand. They put a new cartridge on the hand piece and the equipment takes over from there and auto loads and brings proper torque setting and all that stuff. So although those aren’t very visible changes, we believe that the kinds of changes that will make this a much better first product launch into those practices.
  • Anthony Vendetti:
    Okay.
  • Wally Klemp:
    So kind of going along with that would be like the graphical user interface that they interact with the screen, for example.
  • Chris Capelli:
    So, Wally, let me just add, I was in the clinic when we were doing the clinical trials, and by and large, all the principal investigators, all the technicians who work with it, love the machines, they love how Look, how worked, how simple it was, everything about it. So the changes we’re put into place are not because they wanted those changes. We’re just seeing how we can make this a better product going out there, making it as robust as possible. And so it’s not being driven by what we saw the need. It’s sort of this is making a very robust better product.
  • Wally Klemp:
    Right. But these are considered…
  • Lori Bisson:
    So…
  • Wally Klemp:
    …minor changes by the by the FDA. They’re just…
  • Lori Bisson:
    Yeah.
  • Chris Capelli:
    Yes. That’s correct.
  • Wally Klemp:
    Yeah. That’s correct.
  • Lori Bisson:
    The kind of change that would require a special 510(k) rather than a full secondary 510(k) Anthony.
  • Anthony Vendetti:
    Okay. Great. That’s great. And then the conversations or feedback from the FDA?
  • Lori Bisson:
    Yeah. So we filed the 510(k) for cellulite on June 30th. We heard back from them right after 15-day typical timeline that the application was deemed to complete and they were moving it into substantive review. Now, we are waiting for them to evaluate and assess our predicate determination. And so, they need to look at the devices that we presented to them as the appropriate predicate and make a determination as to whether or not they agree with us. And so, typically, they respond in that regard. It’s an informal response, but by day 60 of your filing process, so that will be the end of this month for us. So we still don’t have clarification from the FDA as whether or not we’re going to be able to say on a 510(k) path. They’ve been pretty quiet, sometimes no news is good news and so we’ll know that by the end of this month. And then if we’re on a 510(k) path, we expect another 30 days to 45 days, we could be clear, unless they have significant questions that we need to respond to, which would stop the clock in the review process, but that’s where we stand today.
  • Anthony Vendetti:
    Okay. But even if they were, and I know, Chris mentioned, reasonable expectation that they will…
  • Lori Bisson:
    Yeah. Yeah.
  • Anthony Vendetti:
    …move forward and that’s the expectation based on the predicate device. But even worst case scenario…
  • Lori Bisson:
    Yeah.
  • Anthony Vendetti:
    … we still believe that by first -- at the end of first quarter ‘21.
  • Lori Bisson:
    Yeah.
  • Anthony Vendetti:
    …which follows of which way the FDA moves, you would still expect approval for the cellulite device correct?
  • Lori Bisson:
    Yes. We believe so. So that -- what would happen if the FDA came back and said to us, we do not agree with your predicate. They would request us to move to what’s called a de novo procedure. And it’s a different form of filing where you’re not comparing your technology to another device they’ve already cleared. You’re literally just presenting them with the clinical evidence and the safety evidence for your device an independent evaluation. And we prepared for our 510(k) filing as if we might need to pivot to de novo. So in other words, the clinical data that we compiled is extensive enough to meet the standard of a de novo. So for us, what we would need to do is split the data out of 510(k) application and into a de novo application and the FDA would begin that review. And they have now put in place a statutory goal of 150 days for a de novo review. And it would it would be with the same reviewers that have already been looking at our device. So, we would definitely expect clearance from that de novo process in no more than nine months closer to six months, which is right in alignment with when we’re intending to launch the product.
  • Anthony Vendetti:
    Okay. Great. And then is it still 20 to 25 KOLs to launch both the products next year? And then if…
  • Lori Bisson:
    Yeah.
  • Anthony Vendetti:
    And then are there specific regions or is it is it driven by specific KOLs as opposed to…
  • Lori Bisson:
    Yeah.
  • Anthony Vendetti:
    …geographic region?
  • Lori Bisson:
    So, Anthony, it’s a combination of both of those things honestly. The overarching philosophy for us is to place devices with the best, most respected and think of them as thought leaders in the dermatology and plastic surgery community. And -- because those doctors are becoming advocates for our technology is what will propel the early phases of the national rollout. And so we’re seeing we are being very thoughtful about the practices that get the first devices and how those doctors are viewed inside their own specializations. From there there’s also an exercise of trying to select doctors that also are geographically close to one another. So there are market hubs, so to speak, in our limited when there’s 20 to 25 devices out so that we can efficiently support those devices from a marketing and a sales service standpoint. So there will be some market territories to the rollout, but it’s primarily focused on the right type of account.
  • Anthony Vendetti:
    Okay. And then the last question is, you’ve selected a contract manufacturer Sanmina, which is obviously, a well known contract manufacturer, A, how did you go about that selection process, and then, what are the details of that agreement? Are there any minimums, when you reach a certain number, do the costs go down? How do you look at that agreement?
  • Wally Klemp:
    So, Lori, why don’t you…
  • Lori Bisson:
    So we…
  • Wally Klemp:
    Let me take the front end of that just in terms of identify -- why Sanmina and how we identify them, but I think you’re in a much better position to speak to the contract structure.
  • Lori Bisson:
    Sure.
  • Wally Klemp:
    Anthony, as you know, because you know my history in devices and building companies, it’s not my first time around what Sanmina in a previous life with medical devices. We used Sanmina as a contractor and they were amazing. They are the world’s largest medical device manufacturer by pretty wide margin contract that is contract medical device manufacturer, with operations all over the world and throughout the country. In this particular instance, because there was this tremendous relationship a lot of history, a lot of trust and confidence in their capability, it was the logical place for us to start. And I would say, in hindsight, looking back, it’s turned out to be a really good decision and I’ll give you an example. The COVID-19 pandemic has created some really bizarre shortages of certain materials and components in the marketplace that would have been really difficult to predict in advance. And so when something disruptive like that happens, it’s really valuable to have a super high-end supply chain management organization that can go source a product, fix a sourcing problem, and sometimes their sheer clout in the marketplace makes a difference. And so, a little Soliton as a standalone producer would be a tiny voice in that storm, if you will. But Sanmina is much different animal and they have been able to in every instance overcome what looked like could be some challenging aspects to getting the materials that we needed in place in order to be ready for the launch that we’re planning on and they’ve overcome all those. And I credit their -- the quality, and frankly, the clout of their organization with having been able to do that seamlessly. But Lori, you want to speak to the contract relationship.
  • Lori Bisson:
    Absolutely. So we do have an agreement with Sanmina for them to manufacture both the devices and the consumables for us. They’ll do that out of their Huntsville, Alabama location. But the contract does not have specific minimum requirements in it. It is driven from PO [ph] commitment. So we will make commitment for them as to purchase volume so many months ahead of time and then we’ll be obligated to make those commitments unless we adjust them. And we’ll have will be allowed some percentage of adjustment, but we are committing to a number of purchases and those purchase commitments also dropped pricing as they get larger the pricing goes down. But the volumes only part of the cost down, it impact for cost of goods sold. There are also -- and Sanmina will lead this effort for us, but there are also a number of important costs down manufacturing things that we will tackle to start bringing cost out of the parts. Things like automation on the line, tooling, different levels of tooling that can bring raw material components down. Those will be being looked at as almost as soon as we’ve launched the first device, we’ll be working on the cost down exercise with Sanmina. So does that answer your question?
  • Anthony Vendetti:
    Yes. Thank you. Lori, Wally, Chris, this is really helpful the clarity and color. Very helpful. Thank you so much.
  • Wally Klemp:
    You bet.
  • Lori Bisson:
    Thank you, Anthony.
  • Operator:
    Your next question comes from Scott Henry with ROTH Capital.
  • Scott Henry:
    Thank you and good morning. Just a couple questions, first, when we think about the launch, you mentioned the KOL approach. In addition to that, how many sales reps do you expect to start with in 2021 and how should we think of that progression, say, as you reach a steady state in 2022?
  • Lori Bisson:
    Yeah. Yeah. So we’re launching to a limited number of practices initially and our sales leadership on hand today, James Bucher, will be able to handle the placement of those devices. What we’re bringing in and we think it’s critical early and before we launched our practice development team members. Those are the people who are in the doctor’s office day in and day out, helping the doctor staff, learn how to talk to patients about our technology and learn how to select patients that the therapy will work well for and to basically sell appropriately inside to the doctor’s office. So those practice development managers will be added in this initial phase. And then towards the end of 2021, we’ll start on building out a real box salesforce, so to speak, the guys that are going to go in and place boxes with doctors. And then, additionally, growing that practice development management team. So, we’ll do that by starting to hire leadership kind of director level sales people that will need to face the street as well initially and then they’ll start building out their team. You can think about it the way we do, which is about 60 offices will be driven by one salesperson and about 30 offices will be supported by one practice development manager. So that’s sort of how we’re scaling. So by the end of ‘22, it’s not a huge number. There’s less than 50 for sure. It’s somewhere between 20 and 30 salespeople that are in place executing the first year of national rollout.
  • Scott Henry:
    Okay. Great. Thank you for that color on that. And then when we look at spending in 2020, should second quarter be representative of the second half of the year or are there any new expenses coming in that we should factor in?
  • Lori Bisson:
    Yeah. It’s fairly representative from a R&D standpoint, where you’re going to see costs begin to creep up a little bit is the investment in brand development spending and some preliminary staffing decisions, that sort of thing. So you’ll see some growth in the G&A line item, and in the selling and marketing line items, because we are gearing up and building the materials and paying for the work to design those materials. And, for example, build a lot of a website that faces doctors and patients on our brand name rather than on our company’s name. And so there’ll be investment spending in sales and marketing towards the end of the year, the last half of this year.
  • Scott Henry:
    Okay. Great. Thank you for taking the questions.
  • Lori Bisson:
    Absolutely.
  • Operator:
    I will now turn the call back over to Walter Klemp, Executive Chairman for closing remarks.
  • Wally Klemp:
    Thanks, Operator. Well, again, I’d like to thank everybody for joining the call today and your continued interest in Soliton and everyone have a great day. Talk to you soon.
  • Lori Bisson:
    Thank you.
  • Chris Capelli:
    Thank you.

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